Tax Transparency Reporting Involves Not Only Data But Also Trust

Social purpose has scaled the global agenda and today is positioned at the forefront of many businesses. Growing calls for transparency are underpinned by worldwide interest in environmental, social and governance, and while calls for tax transparency predate the recent surge in focus on ESG and its associated sustainability metrics and reporting, there is no doubt that they have intensified in recent times. The direction of travel is clear: increased transparency, to satisfy stakeholders.

The Challenge of Satisfying Stakeholders

Although the tax transparency landscape is vast, stakeholders essentially fall within two categories. The first, and larger of the groups, simply wants peace of mind in the knowledge that a company is “paying its fair share” without having to look through the detail.

The second group wants to be able to dig into the numbers themselves and ask questions. Although this is a simplified view, it is unlikely that the first group will be content without the second being satisfied, and information that satisfies the first won’t satisfy the second and vice versa.

Different kinds of stakeholders won’t be one homogeneous “type.” Sustainability professionals may be more interested in understanding the approach to tax and ensuring company activities aren’t contrary to its wider sustainability commitments. Investors and rating agencies are keen to determine whether the tax rate is sustainable and there are no forthcoming surprises, while some civil society actors may be more interested in challenging figures and any associated assumptions.

The challenge, then, is to satisfy stakeholders with such varied needs and levels of understanding.

When we spoke with a wide range of stakeholders in a recent set of round tables to see if there was agreement on a common approach to tax reporting, we found a key issue to be trust. This led us to consider what approach to reporting can increase trust between a company and all its stakeholders.

Many ESG-minded stakeholders—those who see tax as a public good issue—understand enough about tax to consider it odd that a multinational enterprise that operates in a country or territory, generating large amounts of revenue, can pay little to no tax. Conversely, some ESG-minded stakeholders know there are “tax rules,” coupled with the individual MNE/company situation, that might explain such a discrepancy.

How Should Business Respond?

Organizations should gather all the necessary data points and ensure complex rules, and sometimes counter-intuitive results, are presented so they are accessible and understandable without room for misinterpretation. The future of meaningful tax reporting lies in understanding the information made available, and if the system is to truly work, it requires a joint effort between businesses that are reporting and stakeholders using that information.

Businesses must produce meaningful qualitative and quantitative disclosures, moving away from a tick-box mentality by engaging with stakeholders to explain their role in and contribution to society. This balance, if struck right, can lead to better results for both businesses and society, as a general lack of trust between stakeholders and MNEs can be exacerbated by a lack of clarity, which can lead to misunderstandings and a further reduction of trust.

Data and Dialogue

More data isn’t necessarily the answer! “Show us more data” is really saying “we don’t trust you.” The data is complex, so it is necessary to clearly articulate the explanation and narrative around any disclosure, engaging in dialogue with interested stakeholders wherever possible. And although publishing a transparency report provides a great starting point, the supporting dialogue and the relationships it builds is a prerequisite to build trust.

And as important as dialogue is, it doesn’t replace the need for data, which is required to validate a company’s declaration. If a company professes to pay its “fair share,” it is natural to assume there is ample data to support its claims and any data presented is contextualized.

It follows, then, that many stakeholders—the public, customers and employees—do indeed want someone to tell them that a company isn’t doing any dodgy tax business. But in order to do that there is a requirement for those who really care about tax transparency, the numbers, and the disclosures, whether they are the tax department, advisers, investors or civil society, to play their part.

Unfortunately, there is no simple metric to demonstrate compliance and satisfy everyone. In a situation where public disclosure is needed so “anyone” can check, but not “everyone” has the tax knowledge and understanding, a multi-tiered approach is needed. It’s a question of combining data, narrative, and dialogue so those who want to look at the detail can understand a company’s tax profile, and those who just want assurance can be content that it has been properly given. Together, these three tiers work to help build trust.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Chris Morgan is global leader for the KPMG responsible tax program, KPMG International.